Customers in the modern era typically do not transport large amounts of cash or hide a checkbook in a pocketbook. Credit and debit cards have become the standard method of payment at most stores. It’s possible that a growing percentage of clients will go elsewhere if they discover that you don’t accept credit or debit cards. Although merchant owners would greatly benefit from the ability to take credit card payments, doing so is not possible on their own. Merchant accounts are required to facilitate the transfer of funds between a customer’s bank and your company’s bank. In addition, merchant accounts are required in order to handle credit cards. Also, accepting payments by debit and credit card is a standard practice for any modern business, making merchant accounts indispensable. Here in this article, we’ll talk about PayPal and small business merchant accounts together with the providers that offer them.
What Is a Merchant Account?
A merchant account is a business bank account required for accepting debit and credit card transactions, as well as other forms of electronic payment. Merchant accounts facilitate the transfer of funds between a customer’s credit card and the business bank account. Transaction funds are available in a company’s merchant accounts and can be transferred to the company’s checking account immediately after a sale is made.
Furthermore, once a payment processor has established merchant accounts for your company, you will be able to accept credit cards, debit cards, and prepaid cards from your clients. Considering that it is a bank account for a business, you will need a business license in order to open one. Typically, a credit card processing partner will sell you the necessary gear to begin accepting debit and credit card payments. In addition, your chosen payment gateway may even provide you with a free credit card reader to get things rolling.
How Does a Merchant Account Work?
In the event a consumer pays using a credit or debit card, the gateway verifies the card’s validity and the customer’s available funds. They will give the go-ahead for the deal if they see enough money in the bank. While the payment processor works on the transaction, the money stays in the merchant account. The business checking account is credited with the money upon completion of the transaction.
Fees of 3% to 5% (depending on merchant accounts providers) is typically assessed for each and every transaction. All deposits to your account will be reduced by the aforementioned costs.
Bookkeeping tasks such as reconciling transactions after they were deposited, factoring in processing fees, and waiting two or three days for the transaction to clear, took time away from my other priorities.
A physical storefront that does not wish to accept credit cards or other forms of electronic payment and instead just accepts cash can get by with a regular checking account at any financial institution rather than opening merchant accounts. Since clients can only pay for online transactions through electronic means, merchant accounts are an integral part of running an online business.
What Are the Types of Merchant Accounts?
The acceptance of credit and debit card payments requires merchant accounts. As you launch your company, keep an eye on the deals on the table to ensure you’re getting the best possible terms.
#1. Mail Order Merchant Accounts
You can now take credit card payments for mail orders. Businesses whose primary sales channel is the mail or online catalog will benefit most from this. Similar to setting up a telephone account, taking an order typically involves the customer inputting their credit card details into a keypad on a processing terminal or into software on the business’s computer system. Equipment costs are lower than with a retail account, and processing fees are discounted in most cases, however, transaction rates are greater than with a retail account.
Some services allow you to combine your phone and mail-order accounts into one. The services can be purchased separately from a standard retail account, or they can be added to a retail account for a price. Standard retail accounts are used by stores that have a physical location, catalogs that customers order from, and phone hotlines.
#2. Telephone Order Merchant Accounts
A merchant account for telephone orders allows a company to take credit card payments over the phone. An agent can enter a customer’s payment details into a terminal or computer software provided by the merchant services provider while on the phone with the customer.
Infomercials are a common source of advertising revenue for many firms since viewers place orders over the phone during the broadcast.
Home shopping networks like QVC employ this kind of account.
Restaurants that take phone orders for takeout or delivery used to use a phone order merchant account more frequently. The ordering and payment processes could be completed entirely over the phone, saving customers time and effort when it came time to retrieve their food.
However, as time has gone on, more and more customers would rather place their orders online, without the need to interact with a human server. Because of this, a growing number of eateries are accepting payments via e-commerce merchant accounts.
It is normal practice for e-commerce and retail merchant accounts to offer the option of including phone order merchant account services for those who wish to accept phone orders alongside online and in-store sales.
For this reason, telephone order merchant accounts have higher transaction fees than retail merchant accounts. The possibility of fraud increases because the retailer cannot verify the physical presence of the card.
The fees for accepting credit cards over the phone with Square are 3.5% plus 15 cents, whereas the fees for handling credit cards in person are roughly 2.6% plus 10 cents. By demonstrating that you have a plan to prevent such fraud, you may be able to lower the merchant account provider’s risk worries and the fee.
#3. Retail Merchant Accounts
Merchant accounts for retail are set up for providers that have physical locations and wish to accept credit card payments from their customers.
Also, merchant account holders at brick-and-mortar stores accept credit card payments digitally via a point-of-sale (POS) terminal connected to a local area network (LAN). That limits the terminal’s accessibility to just that spot. That’s why establishments with more than one cash register need more than one credit card terminal.
Customers commence processing by swiping, tapping, or inserting their card into the terminal; the terminal then securely receives and processes the card information, securing the customer’s financial data using cutting-edge encryption methods.
For simplicity’s sake, many businesses today choose to receive both their card terminal(s) and retail merchant account from the same source.
When problems arise, it’s helpful to have a single contract and one point of contact. There is no complicated POS system integration or merchant account setup involved in setting this up.
Depending on the business, merchant service providers may also supply card terminals. Most merchant services, however, are up for discussion.
You should utilize the fact that you’re a long-term customer to your advantage and try to negotiate cheaper rates or a free card terminal as part of the deal. Worst case scenario, they refuse to budge.
However, retail merchant account costs are typically lower than those of other types of merchant accounts. Card-present transactions are less dangerous than phone or online orders, although significant retail sales volume is the primary reason for the cheap transaction fees.
The low price, however, does not come without strings attached, such as meeting use requirements to avoid incurring hidden costs.
#4. E-Commerce Merchant Accounts
If your company has a web store and would want to take credit card payments from customers, you’ll need a dedicated “internet” or “e-commerce” merchant account.
E-commerce merchant accounts enable online stores to accept many forms of electronic payment from clients making purchases via their mobile devices, computers, and other Internet-connected devices in a safe and timely manner.
Customers can enter their credit card details into a secure payment gateway on your site and start the payment process by clicking “purchase” or a similar button.
After a customer submits their credit card details, the merchant account plays a crucial part in completing the transaction. In a nutshell, it helps the many people engaged in the deal to talk to one another.
The customer’s banking information is transmitted by the payment gateway to the issuing bank to verify sufficient funds. The branded card processor is then notified, and the information is forwarded to the customer’s card issuer (Chase, Citi, Discover, etc.). All of this occurs instantaneously and secretly.
After verification, the network processor will forward the approved transaction to the acquiring bank. The bank deposits the money into the merchant account once everything has been approved.
Naturally, there are expenses associated with all this backend effort, the most significant of which is the transaction charge. Debit card costs are usually cheaper than credit card fees, which range from 1.35% to 3.50%.
Since online merchant accounts can’t profit from you through card terminal leasing and fees, the transaction costs they charge are typically higher than those charged by traditional merchant accounts.
However, if you don’t have a physical location and do all of your business online, you probably don’t need this kind of merchant account. You can’t set up a web store that takes credit cards or other electronic payments without one.
#5. Mobile Merchant Accounts
With a mobile merchant account, customers can pay with credit or debit cards at their physical location using a mobile smartphone or a portable point-of-sale system. These terminals can be moved around freely, unlike a traditional card terminal.
However, this kind of merchant account is perfect for businesses that are constantly on the go since it allows them to safely and simply accept credit card payments from clients no matter where they happen to be setting up shop for the day.
Food trucks, pop-up coffee shops, lawyers, consultants, tradespeople, caterers, tour guides, and photographers are just some of the mobile businesses that could benefit from setting up mobile merchant accounts.
Mobile merchant accounts are very easy to set up. Account approval and card terminal setup typically take less than 48 hours together, and the card processor interacts seamlessly with your smartphone or tablet.
Nevertheless, mobile merchant accounts often have higher transaction costs than other types of merchant accounts because mobile firms typically have lower sales volumes than brick-and-mortar storefronts or e-commerce sites.
The risk that a merchant account provider perceives in working with your company is reflected in the interest rates they charge.
In conclusion, a merchant account that supports wireless payment terminals is an invaluable tool for any business that operates on the go. They won’t lose potential buyers who don’t have cash but would rather use a debit or credit card.
PayPal Merchant Accounts
When it comes to accepting payments, PayPal is a top pick. To begin accepting payments with PayPal, you must first set up a business account.
Simply put, merchant accounts is PayPal for businesses. You can utilize a personal account for things like online shopping and getting gifts from friends and family. There are a variety of merchant account fees and features available to business owners.
The phrase “merchant account” causes some ambiguity. In contrast to how PayPal operates, the conventional definition of the phrase is entirely different.
A merchant account usually connects to your existing banking setup. Your client makes a payment through a credit card or debit card directly to your merchant account in an online transaction. The funds will be deposited into your bank account instantly. Payment gateways like Square, Merchant One, and PaySafe are all examples of merchant account providers.
When it comes to accepting credit card payments, an offline merchant with an internet presence is the gold standard.
PayPal operates a bit differently. Your payment processing account is hosted by them. Your customer makes a deposit into PayPal merchant accounts using any of a number of accepted payment methods. You will see a credit for this payment in your account dashboard. This money can be sent to an acceptable bank account of your choice.
It all comes down to terminology. A PayPal business account is not the same thing as a standalone merchant account. You are paying with PayPal merchant accounts.
Pros and Cons of Using Paypal
Pros.
- Online shoppers and sellers alike are likely already familiar with PayPal.
- The use of PayPal is pervasive due to its ease of connection with other platforms. It can be set up in minutes. This means it’s suitable for companies of all sizes. PayPal can be used by any online business or independent contractor.
- It is possible to receive funds more quickly than through services like Stripe. Money transfers without fees typically take between three and five business days. You can also make instantaneous transactions.
Cons.
- It can be difficult to understand the cost schedule. Venmo and other digital wallets can save you money.
- High rates of exchange are not uncommon. As a result, PayPal fees may increase for some overseas purchases.
- Their policies are constantly shifting.
What Do I Need to Apply for a Merchant Account?
Many businesses cannot function without the ability to accept credit cards and other forms of electronic payment from their clients. solely 12% of all retail sales in 2022 were made with cash, and that was solely for in-store purchases. However, it can be difficult for business owners, especially new ones, to put up the procedures required to accept these payments.
Business owners often need to submit numerous papers and go through a lengthy underwriting procedure in order to open a merchant account. Having a merchant account, despite these difficulties, has several advantages. Merchant accounts improve a company’s bottom line by allowing for a wider variety of payment methods to be accepted, but they can also boost customer satisfaction. Here are simple steps on how to go about a merchant account.
#1. Opening a Merchant Account Requires Underwriting
Merchant accounts are a form of risk that is taken on by payment processors and their partner providers. The bank runs the risk of being held liable for every single dollar that is transacted over their system.
Let’s say a company accepts payment through their merchant account, but they’re unable to fulfill the order for any reason (they’ve gone out of business, they don’t have enough money to pay their employees, etc.). The customer’s bank is usually responsible for issuing a refund in the event of a chargeback, even if the bank has not yet recovered the funds from the merchant.
Banks consider both the prospect of chargebacks and the veracity of the firm when weighing the risk of opening a new account.
As with a mortgage, the underwriting process will go more smoothly if you deal with an experienced partner. There is a section at some merchant service providers that specializes in getting new businesses set up with their services.
#2. Having a Company Bank Account Is Essential
A commercial bank account is required even for a sole proprietorship in order to open a merchant account. You only need a company license and EIN (employer identification number; this can be your social security number if you’re a lone proprietor with no employees) to open one at your neighborhood bank in under an hour. An EIN can also be requested through the Internal Revenue Service.
The money you transfer will be deposited into your business bank account, and any applicable fees will be taken out of that account. Credits and debits may be segregated into separate accounts upon request.
You should always have enough money in this account to pay for processing costs and, if necessary, monthly software subscriptions.
#3. Merchant Accounts Usually Require a Business License
If you’re not a sole proprietor in some counties, you almost certainly already have a business license. A statement of assumed name or papers of incorporation would both qualify. If you haven’t previously done so, register with your Secretary of State because you’ll need the license for things other than opening a merchant account. A copy of your license is kept on file by the underwriters of your merchant account as verification of your legitimacy.
#4. An Application Is Needed for Underwriting a Merchant Account
A merchant account application is necessary for the underwriting procedure. The majority of service providers now prefer using web-based software. For instance, filling out an application with PaySimple just takes approximately 10 minutes and features an electronic signature that does away with the need for paper copies, scanners, and fax machines.
Also, the application will require details about the company and the account’s authorized signatory. You’ll need your tax ID (EIN), processing volumes (or rough estimates), and bank account and routing numbers to get started. The application may also request information such as the date the firm was established, contact details, details about the business’s beneficial owners, and the identities of any authorized signatories.
#5. Different Payment Options May Require Different Merchant Accounts
It’s possible that you’ll need to go through the underwriting processes of two different processors if you want to accept both credit card and ACH payments. Your ACH/eCheck transactions probably run through a different processor than your numerous credit card offerings. Working with a software vendor or ISO typically eliminates the need for a third-party application.
You’ll have the chance to specify your preferred methods of payment on the application form. If you’re getting assistance with your application, they’ll put everything together, including a copy of your canceled check, and send it out to the appropriate processors. The Terms and Conditions of your application will provide you with information about the many parties engaged in your account.
#6. Underwriters Require Supporting Paperwork
The underwriter will require extra proof of identity and income if you plan to transact a large sum of money. It’s possible that all you’ll need to get started is a voided check and some promotional materials (to show that you’re actually doing business) if your company will just be processing a few thousand dollars a month.
In order to process larger amounts, applicants must be prepared to provide more extensive financial information. Financial documents, including profit-and-loss statements and balance sheets, may be requested for a period of up to two years.
After approval, the processor will keep tabs on your account, so give an accurate estimate of your processing volume. You should avoid making it a habit to process more data than your computer can handle.
Merchant Accounts Providers
When a company uses a merchant service, it can accept payments via debit and credit cards. Many merchant accounts providers additionally provide other payment processing technologies including payment gateways, virtual terminals, and point-of-sale (POS) systems in addition to the merchant account itself.
The most effective methods allow for convenient in-person and digital payment processing at reasonable prices and with no long-term commitments or cancellation fees. However, it’s important to remember that there are various options for charging merchant services.
It is critical to be able to take all payment types, whether you are accepting credit card payments over the phone, from clients shopping online, or in person, which is why selecting the correct merchant accounts providers is crucial. You should also avoid signing any lengthy contracts with any payment processing companies you consider working with. We looked at various merchant accounts providers and payment processing gateways with these criteria in mind to assist you make an informed decision. Also, read High-Risk Merchant Account: Top Best High-Risk Merchant Account Processors in 2023.
Overview of the Merchant Accounts Providers
Here are the best merchant accounts providers to consider as a business owner.
#1. Square
Square is a one-stop shop for merchant services, accepting payments through a wide variety of channels including in-store, online, mobile, virtual terminal, invoice, and QR codes. It is the most beginner-friendly option for merchant accounts providers, and it’s free to use aside from per-transaction costs.
Also, it is the greatest option for startups and small businesses because of its simple, inexpensive, and adaptable merchant services and free point-of-sale software.
Upon signing up for Square’s free service, you’ll have the ability to accept credit card payments, track cash, and check transactions, produce invoices, implement a web-based checkout/ordering system, and accept contactless payments.
#2. Helcim
Helcim is a one-stop shop for all your merchant account services. It’s a lot like Square in that it provides a variety of high-end sales tools for free, such as an online store with a shopping cart and payment processing built in, as well as an invoicing program, point-of-sale app, mobile payment app, rudimentary stock tracking, and hosted payment pages.
Helcim provides interchange-plus pricing, similar to Payment Depot and Stax by Fattmerchant, which is ideal for high-volume merchants.
Unlike its competitors, it does not charge a monthly fee and provides automatic price cuts as usage increases. Helcim is the most cost-effective and convenient option because it does not charge for its software, offers pricing based on interchange plus with no monthly fee, and provides upfront volume discounts.
#3. Stax
Stax is a fantastic option for firms looking for stable prices despite having higher monthly fees than some other processors. If your business processes a lot of credit card transactions, this pricing model may be the most cost-effective option for you. Merchants can select the best plan and pricing for their business from three monthly options ranging from $99 to $199.
Also, the auto card updater is a great addition, as it ensures that your card details are always up-to-date, which in turn reduces the number of refused purchases. Reports on your clients’ average age and lifetime value and stock purchase timing are also useful. Some packages even have an invoicing feature. The merchant is immediately notified whenever a customer settles an invoice, eliminating the need for a manual account check. Stax’s mobile-friendly checkout pages prioritize the payment method that costs you the least to process, so you can save money without sacrificing conversions or customer satisfaction.
#4. Chase
Chase Payment Solutions (formerly Chase Merchant Services) provides merchant services to businesses that have accounts with Chase. Also, Chase acting as both the processing and receiving bank in a transaction can increase speed and security by eliminating a potential weak link in the chain.
Customers of Chase Business Checking account benefit most from using Chase as a merchant service provider. Chase QuickAccept, is the company’s free mobile payments software, including same-day deposits and dispute management for Chase checking account holders.
In addition, Chase is unique among direct processors in that it charges its small business clients a set cost. Helcim is one company that would be amenable to negotiating competitive interchange plus pricing with larger enterprises.
#5. ProMerchant
Unlike most credit card processors, ProMerchant accepts businesses from high-risk sectors including credit rehabilitation and MLM. It is also open to working with businesses and entrepreneurs who may have lower credit scores or no history of accepting credit cards or other forms of electronic payment processing.
ProMerchant’s application process for merchant providers’ accounts is simple, and you can expect a response within 24 hours. You can start accepting payments as soon as three business days after approval when the necessary hardware is shipped out.
However, ProMerchant doesn’t lock you into any long-term contracts; instead, payments are made on a month-to-month basis. If you manage a restaurant or store, you can choose between the Zero Cost plan and Interchange Plus. The Zero Cost Plan is unlike anything else available. In this model, the merchant incurs no upfront charges but must continue to pay any recurring or incidental fees associated with accepting payments from customers.
#6. PayPal
PayPal is well-known for its convenient payment processing options for e-commerce, mobile commerce, and brick-and-mortar stores. In addition to having low, flat costs, signing up for a PayPal account is a breeze. Nonprofits can take advantage of special pricing.
Because customers don’t need to provide their payment or shipping details, having PayPal as a payment option can boost conversions and decrease cart abandonment for online stores. PayPal, the only service of its sort, is regularly used with other merchant accounts, including those on our list.
However, PayPal is not the same as a standard business bank account. Daily deposit firms run the risk of having their accounts reported and closed if the company notices any suspicious behavior. Therefore, online shops should strongly consider adding PayPal as a payment option, especially for infrequent or low-volume sales.
#7. Stripe
Stripe is a payment processor with advanced tools and application programming interfaces (APIs) designed specifically for e-commerce. With Stripe’s pre-made connections, you can easily link a Stripe checkout to practically any platform. Online merchant accounts can use it just as easily as PayPal.
Stripe’s flexibility in accommodating a wide variety of payment methods is one of its strongest points. We accept a variety of payment options including WeChat, Klarna, Apple Pay, Google Pay, international payments, ACH, and electronic checks.
For many checkout scenarios, including per-seat pricing, metered billing, coupons, free trials, prorates, overages, and usage-based fees, Stripe allows you to set up subscriptions, recurring billing, or one-time purchases. Automatically updating client card data is also possible, both when cards are reissued or when they expire.
Can I Create My Own Merchant Account?
Yes, you can create your own merchant account. But, prior to making a final choice, there are numerous factors to consider when selecting a merchant account provider.
And while the best rates and the most attractive conditions depend entirely on the nature of your business, its size, its turnover, its processing history, and many other factors, we would like to highlight the most essential elements you cannot afford to overlook.
- Pick a credit card company to collaborate with.
- Determine the method of payment.
- Examine your sales figures.
- Look for a bank in your area now.
- Site prep is in order.
- Assemble all relevant paperwork
Small Business Merchant Accounts
Your small business will want merchant accounts if you expect to accept any form of payment other than cash. Among the many functions of merchant accounts are the following:
- Provides a safe way to process electronic payments (such as credit cards, debit cards, and ACH) made in-person or online.
- Payments that have been approved will be processed and deposited into your account.
- Offers some safety against consumer payment failures and fraud.
A Small business can accept consumer payments through merchant accounts, relieving them of the burden of managing their finances in-house. With a reliable merchant service provider like PaySimple, you can rest easy knowing that the money your customers pay you will be sent to your bank account without a hitch.
Why Are Small Business Merchant Accounts Necessary?
If you’re a business owner on a tight budget, you should take whatever payments you can get. It’s possible that you’ll lose business if cash is the only form of payment you accept. However, you can take credit card and debit card payments from customers both online and in-store with the help of merchant accounts. When starting a small business, having merchant accounts with services like online reporting and check processing can be invaluable. Further, there are merchant accounts that provide services to maintain PCI DSS compliance, which is essential to the protection of your client’s financial information during transactions.
Overview of Small Business Merchant Accounts Providers
Here are the best providers for small business merchant accounts.
#1. Wave
For independent contractors, consultants, and small businesses, Wave is a free accounting and invoicing solution. The desktop and mobile tools can create, edit, and send invoices and estimates with many payment options, including Pay Now. Wave is a handy way to accept payments, but it shouldn’t be used in place of a regular merchant account.
While Square requires an extra piece of software in the form of an accounting add-on to allow for invoice tracking and management, Wave does it natively.
#2. Braintree
If you’re looking for a free traditional merchant account with inexpensive nonprofit rates to collect donations online and abroad, Braintree, PayPal’s sister business, is a fantastic choice. It has built-in support for PayPal and ACH payments, so you may accept both when people make a donation.
Braintree is superior to PayPal in terms of subscription management, and it also provides specialized merchant services for local businesses. However, if you wish to set up automatic recurring payments, it offers additional and even free customization capabilities (PayPal charges for recurring billing), such as payment gateways with customizable checkout interfaces and a PCI-compliant client credit card data vault.
#3. Flagship
Your company might do better with either an interchange-plus or a flat-rate pricing structure, depending on its specific dynamics. Flagship Merchant Services gives you the freedom to pick the payment processing option that best fits your company’s budget. For low processing fees, an interchange-plus plan is a good option for small businesses that process a lot of transactions.
Flagship’s interchange-plus and tiered processing fees are not made public, unfortunately. You must consult a salesperson for further information. However, the company is so sure that its pricing is comparable that it provides a $200 American Express gift card to anyone who can prove that its rates are higher than its competitors.
Not all payment gateways allow merchants to accept branded gift cards, but Flagship can, and it also allows them to develop a customer loyalty rewards program to boost retention rates.
Instead of producing its own hardware, Flagship Merchant Services distributes that of third-party manufacturers like Clover and Verifone. A Clover Mini POS system or a terminal, whichever the new business prefers, is provided at no cost. You should read the contract carefully because accepting the free equipment will make you responsible for the early termination cost.
Unlike many of the other credit card processing companies highlighted here, Flagship’s iAccess software interface does not provide 24/7 customer support, but it does have how-to videos and other self-service tools.
How Do You Qualify for a Merchant Account?
There is an underwriting procedure that must be completed before a merchant account may be opened. The service provider is primarily concerned with your level of risk.
It’s best to have everything you need before you start the application process. The prerequisites for opening a merchant account can vary depending on the service. However, in most cases, these requirements must be met before a merchant account can be opened.
- Business License
- Employer Identification Number (Ein)
- Business Bank Account
- Voided Check
- Certificate of Formation
- Physical Address
- Financial Statements
- Previous Processing Statements
- Supporting Business Documents
- Security Procedures
Conclusion
In conclusion, accepting debit and credit cards is a must in today’s business climate, regardless of whether you operate out of a storefront, a truck, or solely online. Your company will need a payment gateway, payment processor, and merchant account to accept online payments and deposit funds into a bank account for business purposes. These features may be included as part of a unified package offered by a few services.
Make sure you do some comparison shopping and consider at least two other providers before settling on a merchant accounts provider.
Merchant Accounts FAQs
How Much Does It Cost to Open a Merchant Account?
A monthly fee, statement fee, or account fee (depending on the institution) will normally cost you between $10 and $30.
Why do I need a merchant account?
Your company needs a merchant account if you wish to take credit cards or debit cards from customers. A merchant account is a must-have for any business that wants to receive payments from its consumers.
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